I am a big fan of Angela Merkel. She provides the strong leadership in the current phase of the GFC that was so lacking in the lead up to the collapse of Lehman Brothers. But I think she made a big mistake in demanding that there be no referendum in Greece on the austerity and reform measures needed to secure a new round of bailout funding.
After the negotiations on the terms of the second Greek bailout, on October 26 of last year, the then Prime Minister George Papendreou announced on 1 November his intention to hold a referendum on whether the required austerity measures should be pursued by the Greek Government. The reaction of Merkel and Sarkozy was furious. They made Papandreou travel to meet them in Luxembourg, gave him a public dressing down and then insisted that the referendum be scrapped. Papandreou was critically weakened by this public humiliation and did not last much longer. The commentariat’s reaction to this suppression of Greek democratic processes was generally favourable. Papendreou’s plan was considered to lack courage and wisdom. Many said the referendum proposal was utterly foolhardy.
But it is increasingly evident that Papandreou was right. A referendum was essential. There is no way to avoid a Greek withdrawal from the Eurozone, and the chaos that will attend it, without the buy-in of the Greek people. Merkel and Sarkozy should acknowledge their mistake and encourage a referendum in Greece as soon as is practically possible.
A referendum on the austerity measures would confront the electorate of Greece with a perfectly clear choice — austerity and reform or default and exit from the Eurozone. It would turn the discussion away from navel gazing and blaming of foreigners to a public debate on the impending decision. As the day of the referendum drew closer ordinary Greeks would have to settle in their minds whether they want austerity and reform or exit from the Euro. The fact that there would be no other choice is a result of Merkel’s deserved reputation for steadfastness and strength. The Greeks know that she will cast them into the outer darkness of exit from the Euro, if they do not undertake the necessary reforms and austerity.
A referendum would not allow the Greek people to kid themselves any more about the intractibility of their situation. Greece would be plunged into crisis — leading to default and exit from the Euro — the very day after a vote against austerity. Very few people would doubt that challenge that certainty by the end of the political campaign leading up to the referendum.
The referendum itself would have to articulate what ‘austerity and reform’ means. Defining how much austerity and reform is needed to get complete buy-in from Germany for the rescue of Greece would also reduce a uncertainty a great deal.
In November of last most commentators seemed to think that the Greek people would vote against austerity. I think a vote against austerity is quite unlikely. It might be that public passions are so inflamed and the debate is so irrational that default would be voted for. But in that case there is no hope for the bailout anyway and we may as well move to the next stage.